Accounting Standards 1-29 - Seth & Associates

treated by the lessor as repayment of principal, i.e., net investment in the lease,
and finance income to reimburse and reward the lessor for its investment and
services.
28. The recognition of finance income should be based on a pattern reflecting a
constant periodic rate of return on the net investment of the lessor outstanding in
respect of the finance lease.
29. A lessor aims to allocate finance income over the lease term on a systematic
and rational basis. This income allocation is based on a pattern reflecting a
constant periodic return on the net investment of the lessor outstanding in respect
of the finance lease. Lease payments relating to the accounting period, excluding
costs for services, are reduced from both the principal and the unearned finance
income.
30. Estimated unguaranteed residual values used in computing the lessor's gross
investment in a lease are reviewed regularly. If there has been a reduction in the
estimated unguaranteed residual value, the income allocation over the remaining
lease term is revised and any reduction in respect of amounts already accrued is
recognised immediately. An upward adjustment of the estimated residual value is
not made.
31. Initial direct costs, such as commissions and legal fees, are often incurred by
lessors in negotiating and arranging a lease. For finance leases, these initial direct
costs are incurred to produce finance income and are either recognised
immediately in the statement of profit and loss or allocated against the finance
income over the lease term.
32. The manufacturer or dealer lessor should recognise the transaction of sale in
the statement of profit and loss for the period, in accordance with the policy
followed by the enterprise for outright sales. If artificially low rates of interest are
quoted, profit on sale should be restricted to that which would apply if a
commercial rate of interest were charged. Initial direct costs should be recognised
as an expense in the statement of profit and loss at the inception of the lease.
33. Manufacturers or dealers may offer to customers the choice of either buying or
leasing an asset. A finance lease of an asset by a manufacturer or dealer lessor
gives rise to two types of income:
(a) the profit or loss equivalent to the profit or loss resulting from an
outright sale of the asset being leased, at normal selling prices, reflecting
any applicable volume or trade discounts; and
(b) the finance income over the lease term.
34. The sales revenue recorded at the commencement of a finance lease term by a
manufacturer or dealer lessor is the fair value of the asset. However, if the present
value of the minimum lease payments accruing to the lessor computed at a
commercial rate of interest is lower than the fair value, the amount recorded as
sales revenue is the present value so computed. The cost of sale recognised at the